News:

The Book of the Diner is well worth preserving. I only wish it had reached a broader audience when it might have mattered more. That is a testament to the blindness of our culture. If there is a future to look back from, one difficult question historians will have to ask is how we let this happen, when so many saw it coming. This site has certainly aggregated enough information and critical thinking to prove that.[/b]

Big Oil probably won’t be buying up the Permian Basin’s struggling independent drillers any time soon.

Years of costly exploration and frantic buying sprees have gutted shareholder returns in the world’s largest shale basin. And management teams and their financial backers can’t count on shale-hungry, cash-rich supermajors to buy them out.

Exxon Mobil Corp., Royal Dutch Shell Plc, Chevron Corp. and ConocoPhillips are all on record saying they are wary of scooping up smaller rivals at a time when would-be sellers are demanding premium payouts and global crude prices are under pressure from ample supplies.

There is “not always alignment among buyers and sellers,” Exxon Chief Executive Officer Darren Woods said Wednesday. He suggested Permian drillers may have to be squeezed by weak prices for a bit longer before they dial down their expectations.

“That’s often the case in a market, particularly in one that’s in transition,” Woods said.

Conoco CEO Ryan Lance has a similar view. There are “a lot of bid-ask issues sitting in the market today,” he said on May 23. “Expectations change” is what’s needed to stoke acquisition activity.

Shell has been on the hunt to bulk up in the Permian for some months but has yet to seal a deal. The Anglo-Dutch major was said to be in talks with privately-owned producer Endeavor Energy Resources LP in January.

Occidental may have ended up with a winner’s curse. Carl Icahn, the billionaire investor, sued Occidental on Thursday for its “fundamentally misguided and hugely overpriced” bid for Anadarko.

It is said that you can’t manage what you can’t measure. Measuring the wrong thing can be just as bad, though. Especially if, as in the case of the oil business, what’s being measured is each other.

Without wishing to harass the afflicted, I wrote the other day about how desperately unpopular the energy sector is among investors. Remarkably, its pariah status has been cemented further in the brief interlude since. As of Thursday morning, its weighting in the S&P 500 index stood at just 5%, the lowest since at least 1990.Rejected

The energy sector's weight in the S&P 500 index has hit a historic low, despite the recovery in oil prices over the past two years

Source: Bloomberg

There are clouds hanging over the sector’s future, be it generic things like trade wars or specific challenges like surging shale supply and climate change. But there is also a pernicious legacy of excessive investment, lousy returns on that investment and, consequently, little cash making its way back to investors. At the heart of this is a compensation culture that has long encouraged growth at all costs and skewed rewards in favor of management. And at the heart of that is something meant to keep everyone aligned and on their toes: total shareholder return.

The bulk of executive pay, roughly two-thirds on average, consists of long-term awards like restricted stock units that vest over time. These awards are tied overwhelmingly to total shareholder return, which measures the gain or loss an investor makes from a stock’s performance, as well as any dividends in a certain period of time. Doug Terreson, the lead analyst on the integrated oil sector for Evercore ISI, has been tracking pay trends in detail for several years. Based on the latest proxy filings, he calculates relative total shareholder return determines 56% of long-term pay for CEOs at the majors and 81% for those running exploration and production companies.

That word “relative” is all important.

Boards at oil companies choose a peer group and then measure how their firm’s stock performed in relative terms when setting pay. What that means, of course, is that the whole sector can do terribly, but if the company’s stock was the best of the worst, then the CEO can still be rewarded handsomely. Taking just a second to remind ourselves that energy has slumped to 5% of the stock market, the problem with this Möbius-strip approach to compensation becomes crystal clear.Standard Issue

Oil companies benchmark returns among themselves, while the broader stock-market trounces them

Source: Evercore ISI

The sector stands out in this regard. Terreson writes that while almost every materials, technology and industrial company uses the S&P 500 as a comparison and/or measures of absolute value in setting CEO pay, “these features are conspicuously absent from Big Oil and E&P CEO pay plans.” Not unrelated to this, the industry lags in return on capital, too:Cause And Effect

Dismal return on capital employed means there's little rationale for investors to hold energy stocks - so many of them aren't

Source: Evercore ISI

Chevron Corp. is the only one of the oil companies Terreson tracks that uses the S&P 500 as a peer in setting long-term pay, albeit with a weighting of just 20% in the total shareholder return compensation bucket (the other 80% uses its big oil peers).

One objection raised against benchmarking relative to the S&P 500 is that oil’s volatility just means it’s different from other industries and makes it hard to normalize for commodity prices in setting CEO pay. But this is undercut by two things. First, there is ample empirical evidence that oil-sector compensation rewards management in the good times but shields them when the cycle turns down. Moreover, if companies can normalize for oil prices in drawing up capital budgets, then it isn’t clear why they can’t do so when setting incentives for management.

But back to that 5% figure. Because it renders debates about the theoretical pluses and minuses of using the S&P 500 as a benchmark moot. Quite clearly, investors are already using it as a benchmark. This reflects a broader change, as the mindset has switched from concerns about energy scarcity to expectations of abundance. Oil’s x-factor has been lost, as current insouciance in the face of rising geopolitical tensions captures, making energy just another sector competing among many. The longer oil companies remain wedded to using each other to judge how they’re doing, the more they will merely validate investors’ reluctance.

Fracking has been an “unmitigated disaster” for shale companies themselves, according to a prominent former shale executive.

“The shale gas revolution has frankly been an unmitigated disaster for any buy-and-hold investor in the shale gas industry with very few limited exceptions,” Steve Schlotterbeck, former chief executive of EQT, a shale gas giant, said at a petrochemicals conference in Pittsburgh. “In fact, I'm not aware of another case of a disruptive technological change that has done so much harm to the industry that created the change.”

He did not pull any punches. “While hundreds of billions of dollars of benefits have accrued to hundreds of millions of people, the amount of shareholder value destruction registers in the hundreds of billions of dollars,” he said. “The industry is self-destructive.”

The message is not a new one. The shale industry has been burning through capital for years, posting mountains of red ink. One estimate from the Wall Street Journal found that over the past decade, the top 40 independent U.S. shale companies burned through $200 billion more than they earned. A 2017 estimate from the WSJ found $280 billion in negative cash flow between 2010 and 2017. It’s incredible when you think about it – despite the record levels of oil and gas production, the industry is in the hole by roughly a quarter of a trillion dollars.

The red ink has continued right up to the present, and the most recent downturn in oil prices could lead to more losses in the second quarter.

So, questionable economics is not exactly breaking news when it comes to shale. But the fact that a prominent former shale executive – who presided over one of the largest shale gas companies in the country – called out the industry face-to-face, raised some eyebrows, to say the least. “In a little more than a decade, most of these companies just destroyed a very large percentage of their companies' value that they had at the beginning of the shale revolution,” Schlotterbeck said. “It's frankly hard to imagine the scope of the value destruction that has occurred. And it continues.”

“Nearly every American has benefited from shale gas, with one big exception,” he said, “the shale gas investors.”’Related: China Launches World’s First Smart Oil Tanker

The industry is at a bit of a crossroads with Wall Street losing faith and interest, finally recognizing the failed dreams of fracking. The Wall Street Journal reports that Pioneer Natural Resources, often cited as one of the strongest shale drillers in Texas, is largely giving up on growth and instead aiming to be a modest-sized driller that can hand money back to shareholders. “We lost the growth investors,” Pioneer’s CEO Scott Sheffield said in a WSJ interview. “Now we’ve got to attract a whole other set of investors.”

Sheffield has decided to slash Pioneer’s workforce and slow down on the pace of drilling. Pioneer has been bedeviled by disappointing production from some of its wells and higher-than-expected costs.

But, as Schlotterbeck told the industry conference in Pittsburgh, the problem with fracking runs deep. While shale E&Ps have succeeded in boosting oil and gas production to levels that were unthinkable only a few years ago, prices have crashed precisely because of the surge of supply. And, because wells decline at a precipitous rate, capital-intensive drilling ultimately leaves companies on a spending treadmill.

Meanwhile, as the financial scrutiny increases on the industry, so does the public health impact. A new report that studied over 1,700 articles from peer-reviewed journals found harmful impacts on health and the environment. Specifically, 69 percent of the studies found potential or actual evidence of water contamination associated with fracking; 87 percent found air quality problems; and 84 percent found harm or potential harm on human health.

The health impacts have been a point of controversy for years, pitting the industry against local communities. The industry largely won the tug-of-war over fracking, beating back federal and state efforts to regulate it. However, the story is not over.Related: Philadelphia Refinery Explosion To Boost Gasoline Prices

In many cases, there is an abundance of anecdotal evidence pointing to serious health impacts, but peer-reviewed research takes time and has lagged behind the incredible rate of drilling. Now, the public health research is starting to catch up. Of the more than 1,700 peer-reviewed studies looking at these issues, more than half have been published since 2016.

One need not be an opponent of fracking to recognize that this presents a threat to the industry. For instance, a spike of a rare form of cancer has cropped up in southwestern Pennsylvania recently. The causes are unclear, but some public health advocates and environmental groups are pointing the finger at shale gas drilling, and have called on the governor to stop issuing new drilling permits. The Marcellus Shale Coalition, an industry group, said the request was “ridiculous.” The region is right at the heart of high levels of shale drilling, so any regulatory action coming in response the public health outcry could impact drilling operations. Time will tell.

In the meantime, poor financials are the largest drag on the shale sector. “And at $2 even the mighty Marcellus does not make economic sense,” Steve Schlotterbeck, the former EQT executive said at the conference. “There will be a reckoning and the only questions is whether it happens in a controlled manner or whether it comes as an unexpected shock to the system.”

The recent downturn in oil prices forced a slowdown in the U.S. shale industry, and top executives appear to be gloomier than ever.

According to a survey by the Dallas Federal Reserve, the business activity index in Texas fell to -0.6 in the second quarter, down from a positive reading of 10.8 in the first quarter. A negative reading means that business activity actually contracted from the prior quarter, offering evidence that the slide in oil prices led to a pullback in spending and drilling.

While oil and gas production continued to rise in the second quarter, it did so at a slower pace than in months past. The Dallas Fed said that its spending index actually fell into negative territory, again, an indication of contraction.

A slowdown in drilling is felt most acutely by oilfield services companies, who make their money from drilling volume and activity, rather than from oil sales. Not only did activity dip, but the prices that oilfield services charge for their services fell sharply, and margins were “notably lower” in the second quarter, the Dallas Fed said.

Employment and wages also contracted. The Dallas Fed offers indices on “company outlook,” indices that further highlight the rising pessimism among most firms. The “aggregate uncertainty index” showed a surge of uncertainty from the sector, and it posted the highest reading since 2017.

In short, conditions appeared to have deteriorated in the second quarter, even as the industry posted a “gusher of red ink” in the first.

While the indices offer some quantitative data to back up the souring outlook for U.S. shale, the metrics are also a bit high-level and abstract. The real color comes in the comments section of the Dallas Fed survey, where comments are anonymously submitted by oil and gas executives. These statements offer better clues into what’s really going on at the ground level. Related: Is Hydrogen The New LNG?

For instance, one executive said that the oil price downturn in the second quarter has had a dramatic effect on industry conditions. The “biggest impact has been the rapid and accelerating lack of investor interest in both conventional and unconventional oil and gas. The securities of oil and gas companies now sell at a fraction of what they once commanded. Huge losses in these shares hamper new exploration. It looks like another round of bankruptcies and mergers,” the executive said.

There were countless others that offered similar sentiments. “It is very true that cash is drying up, and it is going to be hard to get financing to drill our wells,” one person wrote.

Meanwhile, the tidal wave of new natural gas supply crashed prices in West Texas last year, and Waha prices have at times fallen into negative territory. Flaring has spiked as a result of a lack of pipelines. Conventional wisdom says weak gas prices barely impact drillers because companies are really targeting oil. But apparently not everyone is immune to rock-bottom gas prices. “We had to shut-in a large natural gas field due to Waha Hub negative pricing,” one company executive said in the Dallas Fed survey.

Yet another called for “a conversation” about government regulation, perhaps mirroring the mandatory production cuts seen in Alberta this year. “We need to start a conversation between industry and government about bringing back pro-rationing (daily production allowables and monthly market factors) again. Nobody’s generating free cash flow,” the comment said.Related: Failing Trade Talks Could Send Oil To $30

Notably, a few outside forces are also having a negative impact on Permian drillers. One person said that “tariffs are raising prices of steel and other services and are a disastrous tool of the current regime in Washington,” while another person said that the increase in interest rates from the U.S. Federal Reserve was “cutting cash-flows.” Another voiced concerns about rising uncertainty due to the U.S. presidential election.

The only positive for the sector as of late is that oil prices have rebounded, with WTI moving back to the high-$50s per barrel on the back of Middle East tension and a sudden decline in inventories. Still, the shale sector was unprofitable at roughly those levels in the first quarter, and by all accounts, drillers continue to burn through cash. In fact, according to Rystad Energy, the return on investment from oil and gas wells in the Permian peaked in 2017.

The OPEC+ extension is likely in the bag, but that may only put a floor beneath prices, rather than leading to a more significant rally. With weak demand and supply continuing to rise, albeit at a slower rate, there is little reason for shale executives to feel optimistic.

A big deal in the Permian basin should be cause for fanfare in oil and gas circles. And yet, a distinct sad-trombone note sounds as Carrizo Oil & Gas Inc. falls into the arms of Callon Petroleum Co.

Callon is offering a 25% premium in an all-stock acquisition, based on Friday’s closing prices. But it’s the absolute price that tells the real story. Carrizo is selling out for $13.12 a share, getting it back to where it traded just less than three months ago – and way below the $23 level where it sold a slug of new shares last August. If Callon is engaging in some bottom-fishing, Carrizo is nonetheless grabbing eagerly at hook, line and sinker.Timing Is Everything

Carrizo is selling to Callon at a low point

Source: Bloomberg

Carrizo’s decision to sell with its stock trading close to its lowest levels in a decade is the salient fact here. It is being paid with stock and its shareholders will own 46% of the enlarged Callon, so they can participate in any gains once the deal is done. They’re better off not looking too closely at their screens on Monday, though: Callon’s stock slumped by as much as 17% Monday morning, wiping out the implied premium.

Even so, there is a compelling logic to shale consolidation. A decade of breakneck expansion has left the onshore U.S. exploration and production business overcapitalized, with a long tail of inefficient smaller companies offering lackluster returns (see this). Carrizo is a prime example. Its total return over the past five years is negative 84%, which makes the sector’s negative 64% look good (the S&P 500 has returned a positive 69% in that time). Indeed, activist firm Kimmeridge Energy Management Co. tried last year to nudge the company into streamlining or selling itself to address this. Carrizo, which was trading at about $17 a share back then, disagreed.

It is telling that up to $45 million of Callon’s synergies target relates to cutting general and administrative overhead. That is equivalent to more than two-thirds of Carrizo’s G&A line, reinforcing one of Kimmeridge’s lines of argument about the inefficiency inherent in such a fragmented industry.

Those cash savings also speak to the other key point in Callon’s marketing push, namely an implied free cash flow number north of $200 million in 2020. Based on Callon’s current price, that implies a pro forma free cash flow yield of about 10%, which may be enough to tempt some investors back into the stock when the smoke clears – although pro forma net debt of two times Ebitda (including synergies) means some of that will have to go toward reducing leverage.

Proving those synergies work and that free cash flow will actually find its way to shareholders is Callon’s main task now. The company hasn’t had a single year of positive free cash flow since 2010, according to figures compiled by Bloomberg. And its own total return has been negative 41% over the past five years – better than Carrizo but still far to the wrong side of zero.

That is the problem with E&P as a whole. Carrizo will hardly be missed by investors, and wringing out some costs would be a good thing. Yet the very fact that Carrizo has chosen to take this price at this time, rather than the usual E&P playbook of banking on the next upswing, says a lot.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

With financial stress setting in for U.S. shale companies, some are trying to drill their way out of the problem, while others are hoping to boost profitability by cutting costs and implementing spending restraint. Both approaches are riddled with risk.

“Turbulence and desperation are roiling the struggling fracking industry,” Kathy Hipple and Tom Sanzillo wrote in a note for the Institute for Energy Economics and Financial Analysis (IEEFA).

They point to the example of EQT, the largest natural gas producer in the United States. A corporate struggle over control of the company reached a conclusion recently, with the Toby and Derek Rice seizing power. The Rice brothers sold their company, Rice Energy, to EQT in 2017. But they launched a bid to take over EQT last year, arguing that the company’s leadership had failed investors. The Rice brothers convinced shareholders that they could steer the company in a better direction promising $500 million in free cash flow within two years.

Their bet hinged on more aggressive drilling while simultaneously reducing costs. Their strategy also depends on “new, unproven, expensive technology, electric frack fleets,” IEEFA argued. “This seems like more of the same – big risky capital expenditures.”

EQT’s former CEO Steve Schlotterbeck recently made headlines when he called fracking an “unmitigated disaster” because it helped crash prices and produce mountains of red ink. “In fact, I'm not aware of another case of a disruptive technological change that has done so much harm to the industry that created the change,” Schlotterbeck said at an industry conference in June.Related: Will The U.S Gas Glut Cap Oil Production?

IEEFA draws a contrast between Schlotterbeck and the Rice brothers. While the latter wants advocates a strategy of stepping up drilling in an effort to grow their way out of the problem, the former argues that this approach has been tried over and over with poor results. Instead, Schlotterbeck said that drillers need to cut spending and production, which could revive natural gas prices.

But while the philosophies differ – relentless growth versus restraint – IEEFA argues that “neither of these strategies seem viable.” On the one hand, natural gas prices are expected to stay below $3 per MMBtu, a price that is unlikely to lead to profits, IEEFA says. That is especially true if shale companies aggressively spend and produce more gas.

However, a strategy of restraint may not work either. “[E]ven if natural gas producers coordinate their activities and reduce supply—a highly unlikely prospect—Schlotterbeck’s expectation that natural gas prices would inevitably rise is questionable,” IEEFA analysts wrote.

There are few reasons why natural gas prices might not rebound. For instance, any increase in natural gas prices will only induce more renewable energy. Costs for solar, wind and even energy storage has plunged. For years, natural gas was the cheapest option, but that is no longer the case. Renewable energy increasingly beats out gas on price, which means that natural gas prices will run into resistance when they start to rise as demand would inevitably slow.

A second reason why prices might not rise is because public policy is beginning to really work against the gas industry. IEEFA pointed to the recent decision in New York to block the construction of Williams Co.’s pipeline that would have connected Appalachian gas to New York City. In fact, New York seems to be heading in a different direction, recently passing one of the most ambitious and comprehensive pieces of climate and energy bills in the nation. Or, look to Berkeley, California, which just became the first city in the country to ban the installation of natural gas lines in new homes. As public policy increasingly targets the demand side of the equation, natural gas prices face downward pressure.Related: The Biggest Challenges Facing America’s Nuclear Sector

Another complication for natural gas producers is that the petrochemical industry, which is attracting tens billions of dollars in investment due to the belief that natural gas will remain cheap in perpetuity. Gas producers, who want higher prices, are in conflict with petrochemical manufacturers, who need cheap feedstocks.

“Companies like Shell, which is considering a $6 billion petrochemical investment, must choose: absorb a higher price cost structure for natural gas liquids (NGLs) needed to produce its product, while facing stiff global competition in the petrochemical business. Or, intensify capital commitments and take over the fracking business, hoping to find synergies through integration,” IEEFA noted. “Both of these scenarios change the risk profile Shell has described to justify its aggressive expansion plans in the Ohio Valley.”

The upshot is that while companies like EQT undertake a major shift in strategy, the road ahead remains rocky either way. “More bankruptcies are all but certain as oil and gas borrowers must repay or refinance several hundred billion dollars of debt over the next six months,” IEEFA concluded.

America's biggest owner of drilling rigs fell the most in seven months after the chief of Helmerich & Payne Inc. said he called the bottom too soon.

(Bloomberg) -- America’s biggest owner of drilling rigs fell the most in seven months after the chief of Helmerich & Payne Inc. said he called the bottom too soon.

Three months ago, when Helmerich had 220 of its rigs hired out, Chief Executive Officer John Lindsay told investors the second quarter would be the nadir for his fleet. But after the number of Helmerich rigs at work shrank to 214 a few weeks ago, Lindsay says his earlier projection was “premature.”

“The full effect of the industry’s emphasis on disciplined capital spending continues to reverberate through the oil field services sector,” he said in a Wednesday statement. “We are reluctant to predict another bottom and see further softening during our fourth fiscal quarter as our guidance would indicate.”

The hired hands of the shale patch who drill and frack wells are suffering from a slowdown in North American spending brought on by investor demands for higher returns. The U.S. oil rig count has fallen 11% this year, according to Baker Hughes.

Fracking giant Halliburton Co. is eliminating jobs and warehousing equipment no one wants to rent. Superior Energy Services Inc. said earlier this week that it’s looking for ways to cut costs and may sell assets to raise cash. On Thursday, 28 of the 29 oil and gas industry stocks in the S&P 500 Index were falling.Hack Away

The frack market “is a mess,” Brad Handler, an analyst at Jefferies LLC, wrote in a note to clients. “With every passing datapoint/call, there is little to suggest this market gets any better, and so we hack away at numbers again.”

Helmerich’s smaller rival Patterson-UTI Energy Inc. also cut its forecast. The Houston-based contractor said in an earnings statement it expects to run 142 rigs on average during the third quarter, down 10% from the previous three-month period.

“E&P companies are being extra vigilant this year in monitoring their spend due to commodity price volatility and the increased focus on spending within their budgets,” Andy Hendricks, chief executive officer at Patterson, said in the statement.

Helmerich & Payne fell as much as 7.6% while Patterson dropped as much as 11% for its biggest tumble since February 2018.

--With assistance from Michael Bellusci.

To contact the reporter on this story:David Wethe in Houston at dwethe@bloomberg.net

U.S. Shale Continues To Struggle

- In the first quarter, an EIA survey of 43 U.S. oil producers finds a deterioration in cash flow of a combined $1.2 billion compared to the first quarter in 2018. Much of that can be pinned on the $8-per-barrel decline in prices over that time period.

- Notably, aside from mostly breaking even in the middle of 2018, the 43 companies have been cash flow negative for years.

- But year-on-year cash flow had been steadily improving since 2016…until the first quarter of this year.

- Liquids production from the 43 companies jumped by 0.7 mb/d in the first quarter and capex declined by $0.3 billion.

- The shale industry, under pressure from shareholders over the last year or two, has begun to prioritize shareholder payouts. The 43 companies spent $4 billion on shareholder distributions in the first quarter, or 31 percent of cash flow from operations. In 2018, the companies had only spent an average of 28 percent.

2. Water is big business in West Texas

- Drilling in the Permian basin is putting stress on the region’s scarce water reserves.

- The median water use per well used in oil drilling in the Permian surged from 2 million gallons to over 11 million gallons between 2012 and 2016, according to the Wall Street Journal.

- Drillers spend between 50 to 75 cents per barrel of water, according to Bluefield Research, which translates to about $200,000 per well.

- The shale industry spent over $13 billion on water in 2018, with 54 percent of that concentrated in the Permian. That total is expected to surge to $54 billion over the next decade.

3. Falling medium-term iron ore prices

- Iron ore prices had been on the rise this year, but they have “switched to correction mode,” according to Commerzbank.

- Prices had hit a multi-year high of $120 per ton earlier this month, close to a record high, but prices have fallen by about $10 since then.

- Part of the reason is that Brazil’s iron ore giant, Vale, is hoping to restart production at some of its mines, which were shut down following disasters earlier this year.

- S&P Global Platts sees a supply deficit for seaborne trade this year of about 54 million metric tons this year, and it could take three years for the deficit to clear.

- Commerzbank is more bearish, pointing to weak demand for steel in China. “In our opinion, there is no fundamental justification for the still high iron ore prices. We expect a further significant correction,” Commerzbank said in a note. “The sharply falling forward curve suggests a price of below $100 at the end of 2019 and even of below $80 by the end of 2020.”

4. European carbon prices spike

- Coal is getting slammed in Europe on two fronts – cheap natural gas and record high prices for carbon.

- Carbon prices are trading near 30 euros, surpassing the previous record set in 2008. Record high temperatures are also adding a bit of seasonal jolt to electricity markets.

- “The latest heatwave in Europe is boosting the upswing because it increases electricity consumption, yet nuclear power production in France is having to be reduced in some places because temperatures in the rivers are too high,” Commerzbank said.

- However, natural gas prices have plunged worldwide amid a glut.

- The end result is a rapid deterioration of coal’s position in Europe. Coal use fell by 40 percent across Italy, France, Germany, Spain, Portugal and the UK in the first six months of this year.

- “The exit from coal is finally driven by the market,” Claudia Kemfert, a professor of energy economics at the DIW research institute in Berlin, told Bloomberg. “The repair of emissions trading has worked.”

5. Small shale companies out of favor

- As the earnings season gets underway, the U.S. shale sector has been hit hard by waning investor interest. “We expect the tone of the reports to be downbeat; we think that the average company guidance on future activity is likely be revised lower,” Standard Chartered wrote in a note.

- Drilling activity has slowed significantly. Standard Chartered said that drilling may not rebound until WTI rises to $66 per barrel, “which is above the surveyed companies’ price expectation over the next two years.”

- But the largest oil and gas companies are doing much better than the smallest. “We calculate that an output-weighted basket of small company equities (less than 20 thousand barrels per day, kb/d) has lost 66% of its value since the start of 2018,” Standard Chartered found. Meanwhile, medium-sized companies with production between 20,000 and 70,000 bpd saw their shares lose 54 percent of their value. The largest only lost 28 percent.

- Despite soaring demand for lithium in electric vehicles, prices are down as supply continues to grow.

- In late 2017, lithium carbonate prices peaked at $25,800 per ton, according to Roskill.

- But from there, prices fell throughout 2018 and into the start of this year, dipping to $11,500 in February 2019.

- A few years ago, analysts worried about constrained supplies, but production has ramped up in China, Australia, Chile and Canada.

- Roskill says Chinese supply has played a critical role in driving down prices. In 2018, “Chinese battery grade lithium carbonate prices fell from US$21,700/t in Q2 to US$11,450/t in Q4, as increased production from domestic brine operations, albeit of poor-quality materials, alleviated tight supply in the Chinese market,” Roskill said in a report.

- But demand is still rising and more supply will be needed in the years ahead. Demand is expected to increase five-fold over the next decade.

7. U.S. oil exports surge, despite very light oil

- The U.S. has become the fifth largest oil exporter in the world after Saudi Arabia, Russia, Iraq and Canada. The U.S. has averaged 2.8 mb/d of oil exports this year, up from less than 0.5 mb/d prior to 2016.

- Despite the lightness of oil from U.S. shale, exports continue to rise.

- The UK and the Netherlands have also purchased cargoes this year, but in the Mediterranean, U.S. crude is less competitive given light supplies from Libya, Algeria and Azerbaijan. “Also, due to lack of deepwater ports in the region, VLCC shipping economics are less favourable,” the IEA said earlier this month.

- China emerged as a top buyer in 2017, but those purchases fell sharply late last year as the U.S.-China trade war ensued, although shipments resumed a bit in April.

- Nevertheless, the U.S. kept oil exports to Asia aloft, finding new markets in India, Korea, Taiwan and Thailand.

The Permian Boom Is On Its Last LegBy Robert Rapier - Jul 28, 2019, 12:00 PM CDT

There’s no question that over the past decade, the U.S. shale oil boom has had a tremendous impact on global oil markets. The surge of U.S. oil production broke OPEC’s hold on oil prices — at least temporarily.

The Permian Basin is responsible for the greatest oil production gains in the U.S. in recent years. Over the past eight years, there has been phenomenal production growth in the Permian. Between August 2011 and today, Permian Basin oil production quadrupled, with oil production there topping 4 million barrels per day (BPD) earlier this year:

Permian Basin oil production.

But recently a number of reports have highlighted a slowdown in U.S. shale oil growth. In its most recent Drilling Productivity Report, each of the six regions tracked by the Energy Information Administration (EIA) — Anadarko, Appalachia, Bakken, Eagle Ford, Haynesville, Niobrara, and Permian — still showed a year-over-year increased in oil production.Related: Why Oil Tankers In The Middle East Shouldn’t Hire Mercenaries

However, if we look at the year-over-year gains over the past few years, there has been a noticeable slowdown in oil production growth. This slowdown is particularly pronounced in the Permian Basin. The most recent estimates in the Permian are that year-over-year production is growing today at just over half the level of a year ago. Production growth there has been in rapid decline since peaking a year ago.

(Click to enlarge)

Permian Basin year-over-year oil production growth.

Should this trend continue, then OPEC’s strategy of maintaining production cuts should ultimately bear fruit. As U.S. shale oil production slows and inevitably declines, OPEC stands ready to regain market share.

The wildcard in this scenario is global demand growth, which the International Energy Agency (IEA) recently revised downward for 2019 to 1.1 million BPD. A year ago the IEA had forecast 2019 demand growth at 1.5 million BPD, and subsequently cut that to 1.2 million BPD on slower growth from China.

OPEC is certainly watching the global demand numbers and U.S. production numbers closely. At some point both will fall, and whichever one falls first will likely dictate oil prices for the foreseeable future.

The EIA projects that U.S. shale oil will continue to grow for most of the next decade. Should it falter sooner — while global demand continues to grow at >1 million BPD — then we shall see a return to higher oil prices.

Time Is Almost Up For U.S. ShaleBy Nick Cunningham - Aug 08, 2019, 6:00 PM CDT

A top U.S. shale executive said that it may only be the Midland basin in the Permian that can grow production beyond 2025.

Aside from Midland, every other shale basin may be on borrowed time, with the best acreage already picked over and oil prices languishing below $60 per barrel.

It’s been a brutal two weeks for the U.S. shale industry, clobbered by a series of poor financial results from several drillers at a time when oil prices more broadly are in freefall. The latest was Oasis Petroleum, which plunged by more than 30 percent on Wednesday, after the company said it would probably spend a little bit more than previously expected, and might produce a little bit less.

Last week, Concho Resources admitted that one of its more promising experiments, a 23-well project, suffered from poor results because the wells were packed too closely together. The company’s share price plunged by more than 22 percent because investors realized that perhaps Concho Resources, and other shale drillers like it, may not be able to produce as much oil as expected from a given level of spending.

But the hits keep on coming. President Trump announced a new round of tariffs, scheduled to take effect in September. China responded by digging in, and letting its currency depreciate, which set off a global panic about currency wars and a slowing economy. Oil entered a bear market, down more than 20 percent from a recent peak in April. U.S. energy stocks across the board fell to new depths.

Prices recovered on Thursday on rumors about more OPEC+ cuts, but that has done little to dispel concerns about U.S. shale.Related: Oil Craters On Fears of Currency War

The industry faces both medium and long-term challenges as well. Pioneer Natural Resources, one of the larger producers in the Permian and widely considered one of the stronger companies, warned about the future of drilling.

“Rig count and Tier 1 acreage is being exhausted at a very quick rate,” Pioneer President and CEO Scott Sheffield told analysts on an earnings call on August 6, referring to the Delaware basin, which has seen a surge of activity most recently.

“I am lowering my expectations of the Permian, reaching 1 million barrels of oil per day growth annually as it did in 2018,” Sheffield said. “I'm still convinced the Permian will reach 8 million barrels a day at a much slower pace with the Midland Basin as the only growing basin in the U.S. past 2025.”

8 million barrels per day is not exactly peanuts. That would amount to another doubling of output compared to today’s levels. But Sheffield said that everywhere outside of the Midland sub-basin within the Permian faces an uncertain future. To be sure, he was arguing that this would enhance Pioneer’s value, since many of its competitors would be knocked out of the market. “Based on the scarcity, if Midland Basin is the only basin growing past 2025, it will make Pioneer's properties worth twice as much money or 3x as much money at some point in time over the next 5 to 6 years,” Sheffield said. Pioneer was one of the few companies that avoided a sharp selloff in its share price, although it reported a $169 million net loss for the second quarter.

But that would presumably mean that U.S. shale production would have to slow or even fall outside of the Midland. The prediction echoed that of Goldman Sachs, which said that the poor results from Concho Resources regarding well density could be a harbinger of broader problems with the future of shale. Concho’s “unfavorable spacing tests and lower than forecast capital efficiency raise justifiable questions whether we are further down the path to when shale no longer becomes as relevant a driver of global supply growth,” the investment bank said in a note to clients.Related: The Reason China Is Winning The Battery Race

Sheffield said that he doesn’t see global oil prices staying below $55 per barrel over the next few years. That would likely mean WTI would be under $50, which he says is just too low for shale companies to be making money. If oil was stuck at those low levels, you would “see a significant fallback in Permian growth,” Sheffield told investors.

Pioneer is no stranger to operational problems. It made headlines in 2017 when it reported a higher gas-to-oil ratio than it had originally anticipated, a worrying predicament since natural gas is much less lucrative. Pioneer also admitted that some of the wells it had drilled in 2017 were a “train wreck,” with underground pressure causing problems and delaying operations. The announcement raised some red flags and Pioneer saw its share price take a nosedive, falling to an 18-month low at the time.

Pioneer has avoided the utter meltdown that has hit other shale companies in recent days, but it’s noteworthy that two years on from its announcement about its train wreck wells, Pioneer’s share price is back down to about the same level. Even the stronger shale companies are facing increased investor scrutiny.

The wheels come off shale oilBy Kurt Cobb, originally published by Resource Insights

August 11, 2019

A flurry of coverage about the gloom and outright calamity in the shale oil business appeared last week. Low prices continue to dog the industry. But so does lack of investor interest in financing loss-making operations for yet another season. Plunging stock prices portend more bankruptcies if circumstances don’t change.

I received considerable pushback last January when I asked whether U.S. shale oil had entered a death spiral. The almost constant refrain of the cheerleaders for the shale oil industry has been that increasing production demonstrates there is something wrong with my analysis and that of others who have been skeptical of the industry’s claims.

We skeptics have certainly been wrong about how long the boom could go on. We could not fathom why investors kept funneling capital into businesses that were consistently consuming it with no hope of ever providing a long-term return.

I can remember when Alan Greenspan, the former U.S. Federal Reserve Bank chair, opined in December 1996 about “irrational exuberance” in the U.S. stock market. His speech turned out to be only an inflection point for the technology sector boom. The tech-heavy NASDAQ stock exchange rose 288 percent between the day Greenspan spoke and the index’s peak in March 2000.

In the subsequent bust the bankruptcy courts were littered with companies that had never made dime.

So far this summer season we have heard two unthinkable utterances come from shale oil industry executives. The first linked above was that the industry has destroyed 80 percent of the capital entrusted to it since 2008. This came from a CEO no longer in the industry.

The second, however, came from one of the largest players in the Permian Basin, the hotbed of shale oil activity. Pioneer Natural Resources CEO Scott Sheffield said that the industry is running out of so-called Tier-1 acreage. That’s oil-speak for “sweet spots.” Those are the circumscribed areas in shale deposits within which extraction costs are low enough to justify drilling.

Outside the sweet spots there is oil, but it is much more costly to extract. The industry at one time likened shale oil production to a manufacturing operation, claiming the one could drill practically anywhere in a shale deposit and get oil out profitably. No one is making such claims credibly any more.

Now, just two years ago the same Scott Sheffield mentioned above compared the Permian Basin to Saudi Arabia. To be fair to Mr. Sheffield, his job is to attract investors so he can drill more wells. So, I fault mostly the investors for not looking carefully at the economics of shale oil which have been free cash flow negative for the industry as a whole for almost a decade.

Some have called shale oil a Ponzi scheme. In a Ponzi scheme the books of the Ponzi operator are kept hidden from the investors so as to make sure they don’t catch on that money from new investors is being used to pay exorbitant returns to old ones. In the case of shale oil, the financials were published quarterly by the publicly traded companies for all to see. And, the wealth extracted by company managements could be calculated practically to the penny.

So, why didn’t investors understand what they were looking at? One possible explanation comes from an oil company executive who explained to me way back in 2009 that oil and gas companies often promote themselves as so-called “asset plays” to investors. They drill a lot of very marginal prospects to get reserves on their books and then tout the growth in their reserves. But much of those reserves will never be exploited at a profit. They are essentially a mirage.

Resource investing is tricky and most investors, even sophisticated ones, can be fooled by the hype. It’s very difficult to know whether something a company calls a reserve is actually a reserve—even more so since 2008 when the Securities and Exchange Commission allowed companies to use “proprietary methods” to determine reserves that are not subject to disclosure.

It’s true that the amount of oil in any one formation can be huge. But that is of no practical consequence if you can’t get the oil out at a profit and do that consistently.

To illustrate, there is enough gold dissolved in the world’s oceans to make all those who are reading this piece millionaires. But the gold remains far too costly to extract.

It seems now that investors are finally realizing that the promise of most of these “asset plays” is never going to be realized. Even a cheerleading trade publication last week ran a piece entitled “Is the US Shale Boom Winding Down?”

We skeptics said shale oil would not work on the so-called “manufacturing model” asserted by industry. It turned out we skeptics were right. The industry actually focused on “sweet spots” that allowed lower-cost extraction.

We skeptics said that a large portion of the sweet spots would probably be exploited within a decade or so depending on the pace of drilling and the price oil. Now one of the industry’s most prominent CEOs is lamenting in public about the paucity of sweet spots remaining.

We skeptics said that investors would at some point realize that shale oil was a long-term money loser. A former industry CEO did the math and calculated the damage as minus 80 percent for investors in the industry as a whole since 2008. Lately, investors seem to be reacting to facts rather than the hype.

Will shale oil rise again from the dead as it did after the 2014-2016 price decline? That will happen only if two things occur: 1) The oil price rises significantly and 2) investors have a serious bout of amnesia.

It’s primary season, which generally means Democratic candidates for President are trying to see who can swing farthest Left. This is especially true when it comes to punishing the oil and gas industry that supplies most of the country’s energy.

The latest test of party purity involves promises to ban fracking if elected. Senator Elizabeth Warren is but one of many to make such a promise, tweeting:

Senator Warren promises to ban fracking.

Senator Bernie Sanders and Senator Kamala Harris have both made similar promises. But these are simply not realistic promises.

What Fracking Did For America

The resurgence of U.S. oil and gas production over the past dozen years is directly attributable to fracking. While fracking has been going on in the U.S. since the late 1940s, it wasn’t until just after the turn of the century that it began to be increasingly used in conjunction with horizontal drilling. That marriage of technologies ushered in the fracking boom and resulted in a renaissance of oil and gas production.

The resurgence of natural gas production followed years of decline and corresponding natural gas price spikes. But as production rose, natural gas prices collapsed. This price collapse was a major factor for utilities switching from coal to natural gas, which in turn resulted in U.S. carbon dioxide emissions declining by more than any other nation. The U.S. became the top natural gas producer in the world, and began to export liquefied natural gas (LNG).

With respect to oil, in 2005 net imports of oil and finished products like gasoline had reached 13 million barrels per day (BPD). But fracking sent U.S. oil production soaring, and that has been the single biggest factor in seeing these net imports drop to less than 1 million BPD.

Consequences of a Ban

How do proponents of a ban envision that it would work? They foresee modest and controlled production declines, offset by other policies that would reduce oil demand. In other words, they don’t believe a ban would lead to a steady increase in oil imports.

However, if we look to California, a different picture emerges. California’s main supplies of oil 20 years ago were its own production and Alaskan production. Neither California nor Alaska engage in fracking to any appreciable extent. Both states have missed out on the fracking-enabled shale oil boom. Instead, oil production in Alaska and California has steadily declined.Related: Rystad: Low Prices To Send Oil Services Market Into Recession

Meanwhile, even though California has the nation’s most aggressive policies to reduce oil demand, that demand hasn’t going down appreciably. As a result, California’s dependence on foreign oil has skyrocketed as its two main sources of domestic production have declined.

California’s dependence on foreign oil continues to grow.

This is instructive, because it is an actual case study of “no fracking” over time. Before the fracking boom, the entire country was becoming increasingly dependent on foreign oil. But even though overall U.S. oil imports have plummeted as U.S. shale oil production has grown, California’s foreign oil dependence continues to climb steadily higher.

According to data from Baker Hughes, nearly 90% of all new oil and gas wells today are horizontal, fracked wells. An immediate ban on fracking — as these candidates have proposed — would result in an immediate decline in U.S. oil and gas production.

Net oil imports, which have been trending down for years, would immediately reverse direction. U.S. dependence on foreign oil would again begin to grow. We don’t have to fantasize about what might happen if we simultaneously adopt aggressive policies to curb demand. We just need to look at the actual results in California.

Natural gas exports would also morph back into natural gas imports. Because global natural gas demand is growing, countries with LNG needs would in many cases turn to countries with fewer environmental protections than the U.S. You may rightfully be concerned about some methane leakage from U.S. wells, but many countries have a fraction of the environmental controls we have in the U.S.

Conclusion: Pandering or Naivety

These are some of the things that would happen if fracking was immediately banned. Those calling for an immediate ban are either pandering, or they are naive. In reality, an immediate ban wouldn’t happen, because a President would never get the political support to enact such a national ban. Local bans will sometimes win support, but there will never be a nationwide ban.

These candidates probably know this — and some may even be aware of the consequences — in which case they are simply pandering to voters. But in the process, they risk losing moderate voters who may have otherwise voted for them.

Did you have some other idea in mind when you said it? I agree that politics won't kill it, but economics can only kill it if folks stop using oil and natural gas. While peak oil demand appears to be coming into view, even that doesn't kill oil production, just lessens it through time. As long as oil prices are high enough to allow oil production, oil production will continue, and so will fracking.